September 2006

Afghanistan Gets Back To Business

The country’s newly revitalized banking system throws up colourful characters and eccentric approaches to marketing. But overseeing it all is a rigorous central banker with solid US commercial banking experience, as Eric Ellis reports.

AFGHANISTAN’S LEADING COMMERCIAL banker doubles as a professional Las Vegas poker player.

And his two-year-old bank is a joint venture with partners drawn from currency traders in the Afghan hawala system, the widespread informal money-transfer network the US wants to shut down because it suspects it is used by Islamist extremists to move money to finance their terror campaigns. Afghan banking’s most popular consumer product is better recognized as a lottery, with monthly draws broadcast nationally on state television.

Kabul’s newest banking tycoon makes most of his money as a petroleum trader, and his right-hand man was once in the German rag trade but is best known as the financial adviser to Afghanistan’s long-deposed king; he now gets around Kabul in a gleaming black bulletproof Humvee, with two armed guards.

To use an ATM at Afghanistan’s leading foreign bank requires you to run the gauntlet of a street known as Sniper Alley, then be patted down by a bristling security detail of Gurkhas before getting access to a cash machine that might or might not be functioning.

Afghanistan has only recently replaced its four competing currencies – including two warlord-backed tenders that were accepted outside their domains at half face-value – with one. This is backed not by foreign reserves but the wavering military commitment of western powers.

Afghanistan’s biggest commercial bank is housed in a building reviled by many because it was the Pakistan Embassy in Taleban times, a centre of much political intrigue.

The central bank building is framed by massive concrete bollards designed to withstand the impact of car and suicide bombs, and the occasional riot, while inside its ancient headquarters, Afghanistan’s central bank governor, Noorullah Delawari, micro-manages staff to such an extent that he gives instructions on how to maintain the building’s toilets, because no-one else will.

Despite the banking system’s eccentricities, Noorullah Delawari, an affable 62-year-old who had a career as a commercial banker in southern California before returning to help rebuild the land of his birth in 2002, is confident that progress has been made. “The development of a banking system has been one of Afghanistan’s success stories since we were liberated. We have come a very long way in a short time,” he says.

At certain crucial levels, Delawari seems right. The central bank he has run for 18 months, Da Afghanistan Bank, now boasts foreign reserves of almost $2 billion, from virtually zero when its vaults were raided by the fleeing Taleban in late 2001. The successful 2003 replacement of four currencies by one was a massive – and highly successful – logistical exercise that seems, alongside the first ever presidential elections a year later, the most telling indicator that Afghanistan does have the will to emerge from a 30-year cycle of war. And although there is still deep poverty in the country, per capita GDP has doubled to $355 since 2002, and is up around $500 if the illegal and thriving narco-economy is included. Afghanistan now has 13 licensed banks and consideration is even being given to developing capital markets – there have already been a handful of modest interbank loan syndications – and a stock exchange.

Delawari is building a banking system from scratch – although the uncertain political situation could affect his ability to do so (see box). There are foreign banks from the UK, Tajikistan, Iran, Pakistan and Tajikistan. UK bank Standard Chartered handles about 70% of the $3 billion to $4 billion in annual aid inflow, says its local manager, Joseph Silvanus, and caters mostly to the foreign community. Three local banks – ING-backed Afghanistan International Bank, Azizi Bank and Kabulbank – have taken about $350 million in deposits, and the government has plans to merge three moribund state-owned banks into a single local entity.

The myriad advertising hoardings around Kabul, a building boom and streets lined with traders are at least cosmetic indications of a sustainable economy in bloom. Afghans used to burying or hiding what little cash they hold are now flocking to the dozen or so bank branches that have sprouted around the country, and in particular to Kabulbank, the hawala joint venture that in just two years has snared more than $200 million in deposits.

Although the cautious Delawari is sceptical about Kabulbank and is keeping a weather eye on its progress, he regards its arrival as a sign of confidence that an economy is beginning to take shape in his war-weary nation. “These are exciting times,” he says, stressing that he regards his bank’s surveillance division as its most crucial department.

An Islamic bank or a lottery?

A sign of confidence is perhaps a generous way of looking at Kabulbank’s achievements. The bank’s sudden success might be more to do with the fact that Afghans like a punt as much as the next person. Indeed, an examination of Kabulbank’s operations brings to mind that old saying that if it walks like a duck and quacks like a duck, then it most likely is a duck. Consider Kabulbank’s Bakht deposit account, launched in April. In the Dari tongue of Afghanistan, the word bakht means “fortune”, which explains the bold exclamation advertised around Kabul that Bakht is “The easiest way to earn a million.”

Since Kabulbank started touting Bakht to customers, its customer base has tripled, making it the biggest of the 11 banks that have opened since the Taleban was ousted by the Americans in 2001, to add to the two moribund state commercial banks. Every $100, or Af5,000, deposited in a Bakht account entitles the depositor to a ticket in a lucky draw, based on an average monthly minimum balance. The draw is held every month, in a lively night of frivolity in a Kabul wedding hall, and beamed across the country on each of its four TV stations. Prominent Afghans join with bank officials and academics to pull winning tickets from a tub – since it is just a few years since the ascetic Taleban were kicked out they haven’t yet descended to bikini-clad barrel girls. The winning ticketholder’s name is read out and if he’s in the room – it’s almost always a man who wins – he’s handed a mock cheque for Af1 million, or $20,000.

So if Bakht looks like a lottery, sounds like a lottery, then it’s? “It is an Islamic banking product, it coincides with religious sentiments”, claims Kabulbank’s CEO Johnson Malliakkal Rappai, an Indian Christian who, before coming to Kabul in 2004, was a line manager in the small Kerala-based Federal Bank. “There’s no interest paid on a Bahkt account. That would be against Islam,” he says. So it’s a lottery then? “No, you cannot say it is a lottery,” Johnson insists. “Here you don’t lose your money, you are getting an incentive by way of luck.”

It’s a nice semantic distinction. Gambling is banned in Islam and Kabulbank’s Bakht line differs crucially from a conventional lottery since the ticketholders, the depositors, keep their stake even if they don’t win the monthly draw for the Af1 million, a lifetime’s income for most of Afghanistan’s 30 million people. Indeed, they remain eligible for the next draw, and those after that, with more chances available every time they deposit units of Af5,000. Although such a product wouldn’t pass the test of the Federal Reserve or the Bank of England – and it has disquieted mandarins at Kabul’s central bank, which has changed its bank monitoring team three times – it’s a dubious stroke of marketing genius from the bank’s point of view.

Kabulbank now has $200 million on deposit and 70,000 customers but with monthly obligations to its Bakht customers that are far less than what a bank would ordinarily return as interest on deposits. “Before we introduced Bakht [in April], we had about 22,000 customers – now we have 68,000,” says Johnson. “Of course we are profitable.” Kabulbank’s Bakht deposits comprise about $25 million, it being very much a product for smaller depositors. “It’s a grand function, very tremendous,” says Johnson, beaming.

That Bakht resembles gambling is perhaps not surprising, given Kabulbank’s heritage. It is owned by a consortium of Afghan money brokers, who got rich operating hawala, the trust-based informal money transfer system the US Department of Homeland Security believes helped fund the 2001 9/11 attacks. Kabulbank’s leading shareholder, with a 47% stake, is Sherkhan Farnood, a Dubai-based Afghan regarded as one of Afghanistan’s richest men. Farnood is undoubtedly a wealthy man, but it might not please those Kabulbank depositors who believe they are banking Islamically were they to know that he is also a professional poker player.

Indeed, the week Euromoney was in Kabul to interview his CEO, Farnood was in Las Vegas participating at the 2006 World Series of Poker, coming runner-up in the Pot-Limit Omaha Championship. The Poker Database website says: “Sherkhan has found his way to many final tables. He did a double in Australia last year, a double in Paris in September and a double in Walsall in November 2003. He likes to drink Blue Label,”a tipple its distiller, Johnnie Walker, says “is not a whisky for beginners”. Another website for poker aficionados, pokerforum.com, describes Farnood as “certainly Afghanistan’s most accomplished poker player. Farnood works as a banker.”

A close friend of the former US ambassador to Kabul, Zalmay Khalilzad, Farnood doesn’t hide his poker prowess, indeed he likes to describe himself as one of the world’s leading players. His reputation among hawala operators is sound. An investor says: “There has never been an incident where has not paid up – this despite his people getting killed and money going missing.”

Johnson got a job at Kabulbank after hearing about it on the Kerala expatriate grapevine, through a relative who had a friend working in Kabul. “I had read about Afghanistan but I was very much scared,” he says. Johnson was ensconced in a good career at Federal Bank but here was a chance to be CEO of a bank, and to be well paid for it. “I was then in charge of about 38 or 39 branches,” he says. “But I had a boss above me.” He was interviewed in Dubai by Farnood and his partners, four leading Afghan moneybrokers operating between Dubai and Afghanistan. “They are leading personalities, wealthy men,” Johnson says.

His CV was accepted by Da Afghanistan Bank and by June 2004, when the bank formally opened on $5 million as basic capital, he was on board as vice-president. A year later he was general manager and in March this year became CEO. “Everything was from scratch,” he says, including what is now the bank’s head office, a three-storey building on Turbazkhan Square, one of Kabul’s main streets, in the Share-e-Naw district. Today the building is awash with men in shalwar kameez, intently scanning screens flickering with interest rate spreads, seemingly oblivious to the fact that this was a building notorious during the Taleban period because it was the Pakistan embassy, reviled by many Afghans as the Taleban’s sponsors.

 With three buildings and a small car park, Kabulbank pays $30,000 a month in rent for the high-profile premises. It employs 726 employees, more than half in security, across 12 branches in six cities, with plans to go to 20 branches in 10 cities. Johnson claims that Kabulbank keeps 15% of its deposits liquid at the central bank, about double the legal requirement. When it comes to the bona fides of account holders, which central banker Delawari says it is important to verify in a country where an AK-47 is often law regardless of who is wielding it, and a third of the economy is illegal narcotics, Johnson insists his bank follows international banking procedure on money-laundering.

Delawari stresses that he regards his bank’s surveillance division as its most crucial department. “You can’t just open an account here,” Johnson says. “All identity should be made available – your passport, your ID, your trade licence. Yes, people can tell lies or have forged documents but we make every effort to establish bona fides, we cross-check it when the money comes. We ask you from where you got this 1 million dollars. And Delawari is a very capable man, but he is not able to supervise the whole of the central bank.”

The last time I saw Hayatullah Dayani he was standing outside a palatial Rome villa a week after the 2001 attacks on New York and Washington, being interviewed by the BBC. He was then a German textile magnate, and an adviser to the deposed king of Afghanistan, who had lived in the villa since being ousted in the mid-1970s. Today, Dayani gets around Kabul in a sleek black and chrome Humvee, with an AK47-wielding security detail, a director of Afghanistan’s newest bank, Azizi Bank.

The bank is named after its Dubai-based chairman, Mirwais Azizi, regarded by many Afghans as their country’s richest man. Azizi handles as much as 70% of the petroleum products sold in Afghanistan, where electricity is mainly produced by diesel generators. He joined another Afghan tycoon, a hawala operator called Haji Ali Akbar, in starting Azizi Bank, and sent a message that the bank is in Kabul for the long term by buying an $8 million villa abutting the presidential palace that was the ministry of tribal affairs under the Taleban.

The villa has been converted into a carpeted banking hall and the bank – open barely a fortnight when Euromoney spoke to Dayani – had taken deposits of almost $2 million and signed on 1,800 new accounts. “We are not involved with any drug money, with any war economy,” says Dayani, who left his business in Germany to join the bank. “This is one of the long-term investments in Afghanistan; this is not an import-export business you can open and close as you like. We have not just picked up staff from anywhere, we have top calibre working for us, from good families.”

Azizi Bank has big ambitions. It wants to become the leading bank in Afghanistan after just a year, with branches in each province and at least $200 million in deposits – about what its main competitor Kabulbank has now. Dayani says Azizi will be of an international standard and, although it has renovated a mosque in its grounds for staff use, does not plan to introduce lottery-style accounts or Islamic banking. “One should keep business away from religion and away from politics; let this country stand on its own feet – many people misuse religion,” says Dayani.

Noorullah Delawari is proud of what he has achieved in just two years at Da Afghanistan Bank, and in building a banking sector. The rebuilding of capacity at the central bank and the currency replacement are “the great achievements of the recovery so far”, he says.

Delawari left Afghanistan in 1967 when his country was a mostly peaceful monarchy, albeit one overrun with western hippies, to take up a Colombo Plan university scholarship in Britain in commerce and economics. While in London, he did some basic training at National Westminster Bank before extra studies at the University of California, Los Angeles. As his studies were ending in the mid-1970s, his country began to descend into political turmoil. In 1979, Russia invaded and Delawari decided to settle in Los Angeles, in suburban Pasadena, where he worked for many years at Lloyds Bank of California, rising to be vice-president and head of its international division and, later, joining Bank of the West and California’s Independence Bank. “I’m a dyed-in-the-wool commercial banker,” he says.

He also immersed himself heavily in Afghan exile politics. “My wife says my mistress was Afghanistan,” he says. “I would spend every vacation I had lobbying in Washington, right from the Soviet invasion. We were very much active to see an internal revolution occur.” Throughout the 1980s and 1990s he stayed in touch with prominent Afghans abroad, while monitoring affairs back home. He saw US interest in Afghanistan’s welfare wax and wane – mostly wane.

The same politicians, he said, who he’d successfully lobbied to fund the 1980s’ anti-Soviet mujahadeen resistance, people like the messianic Texas Democratic congressman Charlie Wilson who were crucial in rallying Washington to militarily support the Afghan cause, told him in the 1990s after the Cold War that “times have changed, America has no more stomach for Afghanistan”.

Delawari remembers being pleasantly surprised to see the LA media show up at a rally he had organized, only to learn that the journalists had got their wires crossed. “They thought we were protesting for animal rights,” he says. “They must have got their Afghans mixed up.”

Then, in 2001, came the 9/11 attacks on the US. He watched, as most did, on television, at home in California. His daughter, who works in Hollywood, was staying a few blocks from the World Trade Center. “I had a feeling who did it, the second plane hit, I immediately realized the consequences.” He had written an article in June forecasting a war involving Bin Laden. “I knew that some day the Taleban era would end.”

It did: by early 2002, Delawari had cashed out his 401K US pension plan to return home for the first time since 1967. He was quickly tasked with fixing the central bank. “It was in a shambles, it was chaotic, we had to start from square one.” He joined the University of Rhode Island economist and Pashtun politician Anwar Ul-haq Ahady, who would become Da Afghanistan’s governor, and then finance minister Ashraf Ghani in the team to right the central bank, and kickstart a banking sector.

“We started Swift, then correspondent relationships, gradually rebuilding capacity,” says Delawari. These were essential for Afghanistan to start receiving the massive aid promised by the world at the donor conferences that followed liberation. Currency reform was also essential, to be as much a fresh start in the “New Afghanistan” as to check rampant inflation and attempt to curb the power of the mujahadeen warlords who had set up de facto ministates in their realms.

“It was extraordinarily confusing,” he says. Currency replacement is a vast and complex logistical undertaking anywhere, but this was a country where large parts were not secure (and still are not), where there are no-go areas, or areas that have no facilities or even roads. “We had an enormous problem, how to collect 18,000 tonnes of the old banknotes,” Delawari remembers. “We needed 8,000 people to do the job but they did not exist. Those who had worked for the few stateowned banks and who had experience numbered only 3,000.”

So Delawari sat down with hawala money changers. His team went to the bazaar, in traditional Afghan clothing, to co-opt the hawala operators to effect the changeover, offering them financial incentives to cooperate. They commandeered whole banks in various cities and set up the conversion process. In Kabul, three floors of state-owned Pashtany Tejaraty Bank were set aside for Afghans to file through, deposit their old notes and accept the new ones.

 There were many unexpected headaches. Delawari’s team devised a system to punch the old notes but the puncher didn’t work. Some 90 shredders also didn’t work, so industrial drills were brought in to drill holes in the surrendered notes. Delawari also found a strong red dye, used for colouring carpets in Afghanistan, to douse the notes before burning. He even tested the dye in his hotel bathtub one night. The team rented incinerators from traditional brickmakers, and built one of their own in Kabul, on secured vacant ground next to the presidential palace.

Delawari laughs when remembering the call he got in the middle of the night. “The whole thing had blown up – the banknotes were flying through the palace grounds.” So they improved the incinerators, relying on traditional insulation methods of animal hair and mud to make sure they were secure and wouldn’t blow again.

They didn’t: three years on, Afghans have got used to the new afghani, but more to currency stability. Set at Af50 to the US dollar, and free floating, the afghani has fluctuated between Af49 and Af51 to the dollar. Economic growth has averaged 17% over each of the past four years from virtually a zero base. Delawari claims annual inflation has been pegged from 29% when he took over the central bank to 9%, although Kabuli street traders say it is running at about 20%.

Delawari says stability comes from the confidence and commitment of the international community, the $10 billion spent by aid and multilateral agencies since 2001 and the further $10 billion pledged by donors through 2009. A stumbling block is corporate lending, in a country where there is no real culture of accounting or accountability. State airline Ariana, for example, filed its first formal results in 21 years last year – a modest profit – and that came after a $50 million effort at president Hamid Karzai’s direction to clean up a culture of corruption and cronyism.

But sometimes it’s not corruption that’s the problem – some of the aid efforts funded by USAid and the World Bank aim to instill basic corporate procedures into the economy – such as training traders on how to present a business plan, which means basic accounting and sometimes, before that, literacy. Delawari is working with Kabul University and the American University of Afghanistan, with courses on accounting and financial literacy, to create an accounting board with national standards.

Delawari says he’s rigorous about fighting money laundering – the washing of drug money from Afghanistan’s rampant $2 billion poppy economy, and the use of the hawala system in funding extremists in a frontline state in the war on terror. A financial intelligence unit has been set up in the central bank, manned by advisers from the US Treasury, to monitor suspicious cash movements. Transactions of $10,000 and more prompt alerts but Delawari says it is a bank’s responsibility to know who its customers are. “If we think it’s suspicious, we have laws to allow us to seize money,” he says.

Bank licensing regulations require the bank to carry out careful investigations of people who are investing in any new bank, examining a criminal past and the provenance of money transfers – something that is important in a cash economy like Afghanistan. Delawari says he is doing enough, mindful of the capacity constraints in his bank, which he estimates to be about 80% of normal international standards. “We have declined people,” he says. “We discovered a bankrupt… we try to make sure the management and directors are fit and proper.”

Delawari, who has kept his American citizenship, is convinced Afghanistan will maintain its stability, indeed prosper. “Whether I will be alive or not, I firmly believe this wave of violence from Afghanistan and the region will finish,” he says. “The world forgot about this region, now what I hear from the Nato secretary-general, the US secretary of state, is a different commitment, it’s a matter of life and death. Afghanistan’s problem is now their problem, it’s the world’s problem. The world has to learn its lesson, the world has seen the impact of this [in 2001], now it’s not a matter of having the stomach, it’s a matter of your survival, of our survival."

"We have to work together, we have to find a way to end this.”

As Euromoney went to press at the end of August, the vagaries of Afghanistan’s fledgling political system – and the impact they might have on the country’s economic revival – were thrown in to sharp relief by parliament’s attempts to oust central bank governor Noorullah Delawari. Delawari fell just three votes short of confirmation in a parliamentary vote. Observers say it is a problem in the Afghan parliament that technocrats such as Delawari are not well known, and much voting takes place along purely party political lines. Delawari is not politically affiliated. Some will see the final outcome of the vote as a test of Afghan president Hamed Karzai’s power base – critics say he is weak when it comes to real political battles. However, Karzai immediately responded by reinstating Delawari as acting governor of the central bank, saying there were no other viable candidates, and the banking and finance committee of parliament asked the president to formally re-nominate him as governor. A number of parliamentary groups immediately declared their support for Delawari.